Amd Research & Development Center India ... vs Assessee

This is an appeal by assessee preferred against the order of the Assessing Officer passed u/s.143(3) r.w.s.144C of the Income Tax Act (Act) consequent to the directions of Dispute Resolution Panel [DRP].

2. Assessee-company in its appeal has raised the following grounds pertaining to transfer pricing adjustments:

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"1. The final order issued by the Learned Deputy Commissioner of Income-tax, Circle 1 (1) ['Ld. AO'] dated 03 December 2013 under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act') is bad in law.

2. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the action of the Learned Transfer Pricing Officer ('Ld.TPO')/Ld.AO in making a transfer pricing adjustment/addition of Rs. 17,88,20,166/-

under section 92CA(3) of the Act.

2.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. TPO/Ld. AO erred in not undertaking an independent verification but simply relying on the order dated 28 January 2013 passed under section 201(1)/201(1A) by the Ld. Assistant Director of Income Tax (International Tax) - I (Ld. ADIT') while coming to the conclusion that the reimbursements of expenses by the Appellant to its holding company/associated enterprise ('AE') amounting to Rs.17,88,20,166/- was against a service which was never received (i.e. in other words a sham transaction/colorable devise to shift cash/profits outside India).

2.2 That on the facts and circumstances of the case, The Hon'ble DRP/Ld.TPO/Ld.AO erred in not giving credence to the findings in the Order of the Commissioner of Customs, Central Excise and Service tax dated 23 July 2012 in this regard.

2.3 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld.TPO/Ld.AO erred in not demonstrating the tax benefit the Appellant derived by such alleged sham arrangement while holding the reimbursement of Rs.17,88,20,166/- as sham arrangement to repatriate cash/profits to its AE.

2.4 That on the facts and circumstances of the case, the Honble DRP/Ld.TPO/Ld.AO erred in not appreciating the fact that as a result of reimbursement of expenses, there was an additional cash inflow/profits in the Appellant Company as against alleged shifting of cash/profits to its AE.

2.5 The Ld. AO/Ld. TPO erred and the Hon'ble DRP thereon further erred in upholding/confirming the action of the Ld. TPO in arriving at 'Nil' ALP for reimbursement of expenses.

2.6 The Hon'ble DRP, while rejecting the submissions made by the Appellant, have erred in not following the decisions of the Hon'ble I.T.A. No.86 /Hyd/2014 :- 3 -: AMD Research & Development Center India Private Limited

Jurisdictional Income Tax Appellate Tribunal laying down the jurisdictional power of a TPO under section 92CA of the Act.

3 On the facts and in the circumstances of the case and in law, the Ld.TPO erred in arriving at Rs.12,12,82,509/- as an alternate TP adjustment to the international transaction of providing Information Technology/software development ('IT') service! to its AE should the primary TP adjustment is deleted/ruled in favour of the Appellant by the higher Appellate authorities.

3.1 The Ld. TPO erred on facts and in law in selecting certain companies as comparables though functionally not comparable to the Appellant.

3.2 The Ld. TPO erred on facts and in law by accepting comparables which make abnormal profits and whose profits over the period fluctuate significantly, while rejecting comparables which were making losses.

3.3 The Ld. TPO erred on facts and in law by arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables.

3.4 The Ld. TPO erred in law and on facts in not allowing appropriate adjustments under Rule 1OB to account for, inter alia, differences, with regard to (a) risk adjustment; and (b) depreciation adjustment [i.e. not considering '(profits before depreciation, interest and tax) / (total operating cost excluding depreciation)' as Profit Level Indicator ('PLI') under Transaction Net Margin Method ('TNMM')] between the Appellant and the comparable companies.

3.5 The Ld. TPO has erred in not following the binding decisions of the Hon'ble Jurisdictional Income Tax Appellate Tribunal while passing the Transfer Pricing order under section 92CA of the Act".

3. Briefly stated, assessee is engaged in the business of software research & development and design services and is a captive service provider to its parent company ATI Technologies Inc ('ATI Canada') and works on cost plus mark up arrangement. For the year under consideration, the company filed its return of income on 30-09-2009 disclosing total taxable income of Rs.96,35,115/. Since assessee has international transactions with its Associated Enterprises [AE], the I.T.A. No.86 /Hyd/2014 :- 4 -: AMD Research & Development Center India Private Limited

matter was referred to the Transfer Pricing Officer [TPO], who passed an order u/s.92CA(3) of the Act on 29-01-2013, recommending adjustment of Rs.17,88,20,166/-. The same was incorporated by the Assessing Officer in the draft assessment order. Assessee preferred a petition before the DRP raising various objections. The DRP while upholding the adjustment of Rs.17,88,20,166/-, however, gave some relief with reference with objections relating to claim of Section 10A. Assessee is aggrieved and raised three grounds with various sub-grounds.

4. We have heard the Ld.Counsel and Ld.DR in detail and considered not only the Paper Books placed on record but also written submissions filed by both the parties in this regard.

5. During the assessment year relevant to financial year, assessee- company made certain remittances to ATI Canada which inter alia includes reimbursement of expenses towards engineering services paid by ATI Canada on behalf of assessee to one M/s. Soctronics India Pvt. Ltd., and towards software license payments on cost to cost basis. Concurrently, there were separate proceedings u/s.195 r.w.s. 201(1) of the Income Tax Act for AYs.2007-08 to 2010-11 initiated by ADIT, (IT)-I, International Taxation. ADIT( International Taxation) had passed an order u/s.201(1) and 201(1A) of the Act on 28-01-2013, wherein the reimbursement of engineering services and towards software applications was held as income distributed to parent company without receiving any services/software. On 29-01-2013, the TPO also adopted the same stand and held that assessee did not receive any services and therefore claim of reimbursement of expenses cannot be allowed. Accordingly, he determined the Arm's Length Price [ALP] of the said expenses reimbursed at NIL and proposed an adjustment of Rs.17,88,20,166/-.

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6. The TPO also analysed the assessee's international transactions with AE to an extent of Rs.98,25,47,908/-. Assessee maintained documentation in terms of Section 92 and for the purpose of bench marking, the international transactions in the nature of provision of IT services, assessee has used Transaction Net Margin Method [TNMM] as the most appropriate method with a profit level indicator of operating profit by operating cost. As per the TP study, assessee earned margin of 11.78% under TNMM and assessee's selected comparables arithmetical mean was determined at 12.66%. Since the margin earned by assessee is within the reasonable range, no addition was considered u/s.92CA of the Act. TPO conducted a fresh search, rejected 11 out of 17 comparable companies identified by assessee and selected 17 new companies thereby taking 23 companies in all for comparison and arrived at arm's length margin at 23.79% and proposed to make a transfer pricing adjustment amounting to Rs.11,43,67,597/-. Since assessee made objections with reference to various companies, in the final order the TPO proposed 17 companies whose margin was arrived at 22.03% and proposed alternate adjustment of Rs.12,12,82,059/-. Since, reimbursement of expending of Rs.17,88,20,166/- was disallowed and by that reason assessee's ALP has increased, TPO did not make any separate adjustment. However, he left a note that in case the expenditure disallowed of reimbursable nature was allowed to assessee by any higher authority, then the transfer pricing adjusting proposed has to be made, since this amount was subsumed in the higher disallowance wherein the PLI was increased from 11.38% to 38.18%. He did not make any separate addition but noted that PLI has to be re- adjusted to 11.38% as initially calculated and in such a scenario, the shortfall of Rs.12,12,82,059/- adjusted on account of provision of software services will stand.

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7. DRP has confirmed the disallowance on reimbursement

expenditure, therefore, it did not adjudicate the working of ALP and the objections on comparables.

8. In the course of present proceedings, it was fairly admitted by the parties before us that the issue of services being rendered by M/s. Soctronics India Pvt. Ltd., for which expenditure was reimbursed was considered by the ITAT vide its order dt.22-10-2014 in ITA Nos.692/Hyd/2014 to 695/Hyd/2014, wherein inter alia it was held that reimbursement of engineering expenses and software license expenses made by assessee-company to ATI Canada was for the benefit derived by the company and is not a case of payment of extra profit/cash to the AE. Vide that order, the ITAT has indeed allowed the software expenses and reimbursement of expenses, therefore, the disallowance per se of Rs.17,88,20,166/- as services not provided and ALP at NIL does not stand. Therefore, ground No.2 raised before us on the issue of disallowance of entire reimbursement of expenditure is to be held in favour of assessee.

9. However, we notice from the orders of the authorities and from the order of ITAT that for the Financial Year 2008-09 i.e., relevant for AY.2009-10 before us, the order of the ITAT indicate the software expenses at NIL and engineering expenses at Rs.10,76,77,131/-. However, the orders of TPO as considered in this impugned order indicate that amount was at Rs.17,88,20,166/-. Even though in principle, we agree with the findings of the ITAT with reference to the nature of services being rendered by the said company, we, however, direct the Assessing Officer to examine the amounts involved and reconcile the payments considered in the order of ADIT, International I.T.A. No.86 /Hyd/2014 :- 7 -: AMD Research & Development Center India Private Limited

Taxation u/s.201(1A) and the amounts considered for disallowance in this order by the Assessing Officer.

10. Subject to the above observations and reconciliation of the amounts involved, the disallowance of entire amount does not arise. Ground No.2 is considered allowed accordingly.

11. Now, coming to the issue of ALP adjustment of Rs.12,12,82,059/-, even though assessee has objected to the inclusion of various comparables, not giving adjustment on account of difference in depreciation policy and other objections with reference to determination of ALP, we are of the opinion that this issue has to be restored to the file of DRP for fresh adjudication. As briefly stated, the DRP did not adjudicate any of these issues, as it has confirmed the disallowance made by the TPO of reimbursement of expenditure which resulted in higher ALP of assessee's transactions. Since that issue is held in favour of assessee in ground No.2, the issue of adjustment under the TP provisions has to be considered afresh. Since the DRP did not examine any of these issues, we are of the opinion that the matter has to be restored to the file of DRP, who should consider the objections of assessee on various comparables. We were also informed that with reference to the adjustment for deprecation, the DRP has issued favourable directions to consider profit before tax and deprecation for arriving the PLI in AY.2010-11. Since, we are not adjudicating the issues on merit, these matters can be examined by the DRP, consistent with the orders passed in assessee's own case in other years. The DRP also should consider assessee's objections on various comparables and pass detailed order on the proposed TP addition of Rs.12,12,82,059/-. Accordingly, the issues in ground No.3 raised by assessee are restored to the file of DRP for which purpose, we set aside final order of the I.T.A. No.86 /Hyd/2014 :- 8 -: AMD Research & Development Center India Private Limited

Assessing Officer and the order of the DRP, so that fresh order(s) can be passed according to law after giving due opportunity to assessee. With these observations/directions, ground No.3 is considered allowed for statistical purposes.

12. In the result, the appeal is allowed for statistical purposes.

Order pronounced in open Court on 04th March, 2015.

Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 04th March, 2015

TNMM

Copy to :

1. AMD Research & Development Center India Private Limited, 8th Floor, Building No.11, Raheja IT Park - Mindspace, Survey No.64, APIIC Software Layout, Madhapur, Hyderabad - 500 081.

2. The Deputy Commissioner of Income Tax, Circle-1(1), Aayakar Bhavan, Hyderabad.

3. Dispute Resolution Panel (DRP), Hyderabad.

4. The Director of Income Tax, International Taxation, Income Tax Towers, 10-2-3, A.C. Guards, Hyderabad-500 004.

5. Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad-500 004.

6. D.R. ITAT, Hyderabad.